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Japan has over three hundred species of cherry trees.

Located on the banks of Okawa River, the park features 5000 beautiful blossom trees standing majestically. This paper investigates whether there has been risk-sharing between banks and borrowing companies through the main bank relationship in Japan. The paper will discuss, if the main bank relationship is based upon a mechanism of risk-sharing, changes in the relationship ought to be systematically related to changes in the risk that borrowing companies face. “Financial group” is defined in principle by the amount of financing that a bank supplies to a particular borrowing company. While the main bank is an important lender, the company must also rely on loans from the main bank’s competitors which in sum far exceed those from the main bank itself.

There is a type of contingency claim between banks and the borrowing companies which are in their financial groups. There is another study supports the hypothesis that in the Japanese bank loan market, banks and firms share risks through loan contract arrangement. They even say that some part of the loan interest rate rigidity in Japan can be explained by the implicit contracts between banks and borrowing companies.

This becomes clearer if we consider the next set of accounting equations for the Japanese company: (operating profits)+(non-operating revenues)-(non-operating expenses)=(ordinary profits); (ordinary profits)+(extraordinary profit and loss + special retained funds)-(corporation taxes)= profits for the period.

In this sense, if the main bank relationship actually serves to diversify risk, we should observe financial expenses of client companies being adjusted to offet shifts in their operating profits. The first was to examine the relationship between changes in main bank affiliations and changes in the uncertainty that borrowing companies were confronted with. The second was to examine whether the main bank relationship actually contributed to offsetting movements in the operating performance of individual companies.